Shanghai steel, iron ore extend drop as China demand thins

* Iron ore has dropped 3.5 pct from last week's 15-month
high
* Most China mills have stopped buying iron ore, slow steel
sales

By Manolo Serapio Jr
SINGAPORE, Jan 16 (Reuters) - Shanghai steel futures fell
for a second day on Wednesday amid uncertainty over the outlook
for demand from top consumer China, which has curbed appetite
for iron ore and may continue to drag down prices that rose to
15-month highs last week.
The most active rebar contract for May delivery on the
Shanghai Futures exchange was down 1 percent at 3,931
yuan ($630) a tonne by the midday break, losing ground from last
week's six-month peaks as Chinese spot steel prices dropped.
That could further sour demand for raw material iron ore,
whose price gain of nearly 40 percent from December has bloated
costs for most Chinese steelmakers.
"Most of the mills have stopped buying iron ore for the time
being and sales of steel products are also very slow," an iron
ore trader in Shanghai said.
Iron ore with 62 percent iron content .IO62-CNI=SI, the
industry benchmark, fell 1.1 percent to $152.90 a tonne on
Tuesday, according to data provider Steel Index.
The price has dropped 3.5 percent since reaching $158.50 a
week ago, its highest since October 2011. But it remains up 76
percent from three-year lows hit in September, and traders say
prices could bounce back.
"After next week, I think buyers will come back ahead of the
Chinese New Year," said the trader, adding that prices could
fall to between $145 and $150 before buyers return to stock up
ahead of the week-long Lunar New Year break in February.
Still, the next restocking phase could be modest, since most
mills have already done so over the past month, he said. China's
iron ore imports hit a record 70.94 million tonnes in December,
customs data showed last week.
Traders are eyeing a tender of Australian 61-percent grade
Pilbara iron ore fines due to close later on Wednesday, with
some anticipating the cargo to be sold at $148 to $150 per
tonne, down from nearly $160 last week.
Sellers of foreign iron ore cargoes to China slashed prices
for a third straight day this week on Wednesday, by up to $2 per
tonne, according to Chinese consultancy Umetal.

NO BIG HOPE
A sustained rise in Chinese steel prices will be key to
whether iron ore will be able to resume a rally that has
surprised many market participants and could give global miners
a strong incentive to revive expansion plans.
Rio Tinto , the world's No. 2 iron ore
supplier, aims to increase output by 15 percent this year after
production in 2012 climbed to 253 million tonnes, ahead of its
target.
"I'm not putting too much hope on steel demand. The economy
might be a bit better, but the new government may not
concentrate on infrastructure investment that much, since the
focus is on a more sustainable growth path," said a purchasing
manager for an iron ore trading firm in Shanghai.
China's foreign direct investment inflows fell 3.7 percent
in 2012 from a year ago, the first annual drop since the global
financial crisis, as world economic uncertainties curbed
investor enthusiasm for deals in emerging markets.

The World Bank cut its world growth forecast for the year to
2.4 percent from 3 percent, saying a slow recovery in developed
nations is holding back the global economy.

Shanghai rebar futures and iron ore indexes at 0412 GMT

Contract Last Change Pct Change
SHFE REBAR MAY3 3931 -46.00 -1.16

THE STEEL INDEX 62 PCT INDEX 152.9 -1.70 -1.10
METAL BULLETIN INDEX 150.42 -0.45 -0.30

Rebar in yuan/tonne
Index in dollars/tonne, show close for the previous trading day
($1=6.2136 Chinese yuan)

(Reporting by Manolo Serapio Jr.; Editing by Clarence
Fernandez)